10 - 2 1. Define capital structure, and explain why it is important to a company. 2. Explain when it is beneficial for a company to use financial leverage. 3. Explain why cash flows are important for a company’s financing decision. 4. Use financial statements to evaluate the financing activities of different companies. Objectives Objectives

10 - 3 5. Determine and explain the effect of financial leverage on a company’s risk and return. 6. Use cash flow and liquidity measures to evaluate financing decisions. 7. Explain why financing activities are important for determining company value. Objectives Objectives

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10 - 4 Financing Decisions Financing Decisions Capital structure is the relative amounts of debt and equity used by a company to finance its assets. A firm either can borrow money, or it can issue stock Obj - 1

10 - 7 Financing Decisions Financing Decisions Return on equity (ROE) is net income divided by stockholders’ equity. It measures net income relative to the amount invested by stockholders in a company, and is used by investors and financial analyst to compare the performance of companies Obj - 1

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Financing Decisions Financing Decisions It can be used to compare one company’s performance with another (or to an industry standard), or to compare a company’s performance in one period with its performance in another period. Obj - 1

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